Monday, November 15, 2010

Caterpillar Gets Bucyrus for $7.6 Billion (DealBook)

Caterpillar announced Monday that it had agreed to buy Bucyrus International for $7.6 billion in cash, making a big bet that emerging markets like China will to continue to fuel the commodities boom in the years to come.

The purchase of Bucyrus will help Caterpillar expand its global footprint in the mining equipment industry and enable it to offer one-stop shopping for its customers, selling everything from mining trucks to hydraulic excavators to electric-rope shovels.

Caterpillar executives said no other company came close to matching that range of equipment offerings.

“Customers have asked us for a broader product line, and with this move we are answering that call,” Caterpillar’s chief financial officer, Edward J. Rapp, said during a conference call with analysts. “These two companies were meant for each other.”

Bucyrus specializes in large-scale surface and underground equipment for the extraction of coal, copper and other minerals. The company reported $313 million in net income on $2.65 billion in revenue last year, with more than 60 percent of its sales originating outside of the United States.

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Caterpillar is paying $92 a share for Bucyrus, which represents a 32 percent premium over Friday’s closing price. Caterpillar said that it would locate the headquarters of its mining business in South Milwaukee, Wis., where Bucyrus is based, and that it would preserve the Bucyrus brand, which dates back to 1880.

The deal bets heavily on emerging markets like China, India and Brazil, where continued urbanization is expected to drive demand for commodities like coal, copper and iron ore.

“There’s still arguably several billion people out there that will modernize and progress, and that’s the play we’re making here,” said Caterpillar’s chief executive, Douglas R. Oberhelman. “It’s a macroeconomic play — that this thing continues and sustains itself, which we think it does. And long term, it will be great for this company.”

There is little overlap between Caterpillar’s offerings and the products sold by Bucyrus, the companies said. Caterpillar noted that at many mine sites, workers use Bucyrus shovels to load Caterpillar mining trucks.

In large part because of the complementary product lines, Caterpillar said the acquisition should exceed $400 million in cost-savings by 2015.

Bucyrus’s president and chief executive, Timothy W. Sullivan, said he came to an agreement with Caterpillar after Mr. Oberhelman approached him and the two executives realized how tightly the two companies’ offerings would fit together.

The deal marks the biggest splash yet by Mr. Oberhelman, who became chief executive on July 1. “It is a strong statement about our belief in the bright future of the mining industry,” he said.

There has been little indication that Bucyrus was planning to sell; to the contrary, the company agreed last December to pay $1.3 billion for the mining business of the heavy-equipment manufacturer Terex, which has a strong presence in China and Indonesia.

Shares of Bucyrus jumped 29 percent on Monday, gaining $20.18 to close at $89.80. Shares of Bucyrus’s most comparable peer, Joy Global, also got a boost, rising more than 7 percent on speculation that it could be a takeover target for a Caterpillar competitor like Komatsu Ltd. or Hitachi Construction.

Analysts said that while there is no question that Caterpillar is paying a hefty price for Bucyrus, the availability of cheap debt makes that premium acceptable. They said the clout that the combined company will have would make it appealing to customers, who increasingly want to save money by reducing the number of suppliers with which they contract.

“It may predicate further consolidation from other competitors in order to keep up,” said Lawrence T. De Maria, an analyst with Sterne Agee, who called the two companies a “snap fit.”

Above all else, perhaps, the deal signals that Caterpillar is doubling down its mining business.

“It’s a big bet on commodities, a big bet on emerging economies,” said Adam Fleck, an analyst with Morningstar. He added, “With a purchase price this full, it doesn’t give much in terms of wiggle room if they are wrong.”

The deal is the third significant purchase by Caterpillar, based in Peoria, Ill., in recent months. Three weeks ago, the company purchased the German engine maker MWM Holding from the British private equity firm 3i, and in June, Caterpillar bought the locomotive manufacturer Electro-Motive Diesel.

Caterpillar said it would pay for the Bucyrus acquisition using cash from its balance sheet and debt. It will also sell as much as $2 billion in shares to finance the deal, which it expected will close in mid-2011. Caterpillar placed the over all value of the deal at $8.6 billion, including the assumption of Bucyrus debt.

JPMorgan Chase advised Caterpillar and will provide financing. Mayer Brown, Sidley Austin and Howrey served as legal advisers for Caterpillar.